March was a rocky month for emerging market (EM) debt amid elevated tariff uncertainty and heightened geopolitical risks. Against this backdrop, higher-risk frontier sovereign bonds (-1.3%) underperformed hard currency sovereign bonds (-0.8%) , while more defensive corporate bonds (+0.1%) held up better. Local currency bonds (+1.6%) were the top performer as EM currencies strengthened against the US dollar. The 10-year US Treasury yield ended the month unchanged at 4.21%.

Tariffs again took centre stage in the month as markets weighed the potential severity of US ‘reciprocal tariffs’ ahead of ‘Liberation Day’, which took place just outside of the review period on 2 April. The Trump administration moved ahead with the implementation of 25% tariffs on Mexico and Canada at the beginning of March and imposed an additional 10% tariff on China.

Elsewhere, geopolitical risk in the Middle East rose as the US launched a new air campaign against the Houthis in Yemen and Israel resumed its offensive in Gaza, signalling the end of the ceasefire which began in January. Israel also launched airstrikes at Hezbollah targets, including near Beirut for the first time since the ceasefire began in November. Given the potential for supply disruptions, the price of Brent crude oil rose by 2.1% over the month to US$74.74 per barrel.

In terms of performance specifics, the JP Morgan EMBI Global Diversified index fell -0.8% with spreads widening by 21 basis point (bps) to their widest level since October. This resulted in a negative spread return (-1.1%) which outweighed the positive treasury return (+0.3%). The Middle East and Asia were the top performing regions, owing to a higher concentration of investment-grade countries, while Africa significantly underperformed. Senegal was among the worst performers after S&P downgraded the country’s rating to B with a negative outlook on the back of weaker fiscal metrics revealed by auditors. Bolivia was the top performing country due to expectations of a more market-friendly administration after this year’s election.

In local currency sovereign bonds, the JP Morgan GBI-EM Global Diversified Index (unhedged in US Dollar terms) rose +1.6% this month. The yield on the index fell by 3bps to 6.30%, generating a positive bond return (+0.3%), which was accompanied by a positive currency return (+1.2%). Europe was the top performing region, benefiting from a strong correlation to the euro, which strengthened as European leaders agreed to ramp up defence spending in response to the suspension of US military aid to Ukraine. Turkey, however, was by far the worst performer after the mayor of Istanbul and President Erdogan’s most prominent rival, Ekrem Imamoglu, was detained. The move sparked a sharp selloff in Turkish assets and the lira.

Lastly, the JP Morgan CEMBI Broad Diversified (EM Corporate Index) rose +0.1%, as the positive Treasury return (+0.4%) offset the negative spread return (-0.3%), with spreads widening by 12bps to 265bps. Similarly to sovereign EM bonds, investment-grade corporates outperformed (+0.2%), while high-yield corporates lagged (-0.1%). Regionally, the Middle East was the top performer, while Europe underperformed.

Selected country news

Trump continued to pressure Ukraine in efforts to broker an end to the war with Russia. Following talks in Saudi Arabia, the US announced that Russia and Ukraine had agreed to a truce in the Black Sea and to work out mechanisms for implementing a limited ceasefire of strikes against energy infrastructure. However, the optimism was short-lived, as it became clear that the agreement was only in principle, with significant implementation hurdles remaining. In Venezuela, President Maduro reversed a previous decision to stop accepting deportees after the US announced that it is giving Chevron one month to shut down oil production in the country. The US later extended Chevron’s wind-down license to 27 May but also threatened to impose a secondary tariff of 25% on foreign countries buying Venezuelan oil, beginning on 2 April.

Authorities in Turkey detained the mayor of Istanbul and President Erdogan’s most prominent political rival, Ekrem Imamoglu, as part of an investigation into alleged corruption and terror links. Istanbul University already revoked Imamoglu’s diploma, which is a mandatory requirement for the office of presidency, thus disqualifying him from challenging Erdogan in the next presidential election. Imamoglu’s detention raised political risk and sparked a wave of anti-government protests, with hundreds of thousands of people defying a ban imposed on protests by authorities. In Romania, the far-right candidate Calin Georgescu lost his appeal against a legal ruling that barred him from participating in May’s presidential election, owing to his alleged anti-democratic and extremist positions.

It was another quiet month for credit rating changes. S&P raised Saudi Arabia’s rating to A+ as measures to spur investment and consumption are expected to support non-oil growth prospects over the medium-term. S&P also upgraded Albania’s rating to BB, reflecting the country’s strong economic and fiscal performance over the last few years.

Outlook

We continue to see value in the high-yield and frontier space where spreads and yields look attractive, supported by structural reforms and continued multilateral support. However, we think the growing risk of a US recession could support a US Treasury rally, so we have reduced our underweight in investment grade. In EM local markets, although many rate-cutting cycles are mature, central banks will likely continue reducing rates as economies slow and inflation benefits from favourable base effects. We remain overweight in Latin America due to attractive real rates in the region.

For EM corporates, credit fundamentals remain supportive and net supply should keep reducing as companies continue to pay down bonded debt. As global economic growth slows, we are likely to see downward adjustments to operational performance; however, leverage levels remain low and interest coverage healthy.

The biggest risks to the EM asset class include an escalating trade war which would hurt EM exports and global growth. A US recession and a failure of the Chinese economy to rebound could weigh on commodity prices, particularly oil. Geopolitical risks also remain, including in the Asia Pacific region, the Middle East and Russia-Ukraine.